American Air Pulls Back Bonus Plans for Executives

Published: April 19, 2003

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"There has to be a perception that both parties are sacrificing for the greater good," said Paul Clark, professor of labor studies and industrial relations at Pennsylvania State University. "This is anything but a sacrifice. It sends all the wrong signals."

The airlines generally defend their executive compensation packages by saying they need to offer enough incentives to keep these managers around during a time of crisis. They also say that some executives were given big raises last year because their companies did not perform as poorly as rivals, even though the return to shareholders was dismal.

Continental Airlines and Delta both have compensation packages tied to relative industry performance. Gordon M. Bethune, the chief executive of Continental, had total compensation last year worth $14.7 million, a 172 percent increase over 2001, according to Pearl Meyer &#0038; Partners, an executive pay consulting company. In the period, the company reported a loss of $451 million, and investor return was a negative 72 percent.

Ned Walker, a spokesman for Continental, said that part of Mr. Bethune's pay "is basically valueless in today's economic environment and has a long way to go before it gets into the money." But that statement refers primarily to Mr. Bethune's stock options. Excluding those, Mr. Bethune's compensation rose by 82 percent.

Mr. Bethune, meanwhile, has said Continental will lay off 1,200 workers this spring as part of a plan to cut $500 million a year in costs.

It is true that Continental is in a healthier position than some of its rivals, and one could argue that Mr. Bethune performed better last year than some peers in the industry. But compared with many companies in this country, Continental performed disastrously, if investor return is used as a benchmark. Critics say cases like this show that company boards need to begin relying more on measures of absolute performance rather than just gauges of relative performance when determining pay.

"The board needs to exercise some judgment in assessing whether the payments are warranted from the shareholder perspective," said Pearl Meyer.

Partly because of relative-performance criteria, Mr. Mullin at Delta received a compensation package worth $13.8 million last year, a 104 percent increase from 2001. Meanwhile, the airline reported a loss of $1.27 billion and investor return was a negative 58 percent.

After drawing scathing criticism from Senator John McCain, Republican of Arizona, and Delta workers, Mr. Mullin said on April 3 that he would take a cut on his 2003 base salary, to $596,250 from $715,500. He added that he would forgo a potential bonus of $1 million and give up stock-based retention awards valued at $5.5 million. But he did not give up millions of dollars that Delta paid to the executive pension trust fund set up in his name, the same kind of fund under fire now at American.

Other airline executives have said recently they will take cuts in their pay. Mr. Carty said last month that he would take a 33 percent cut off his annual base salary of $811,000 and forgo a cash bonus for a third consecutive year. Glenn F. Tilton, the chief executive of United Airlines, part of the UAL Corporation , said on April 4 that he would take a cut of 14 percent to his base salary of $828,500 this year. But pay experts regard cuts to base salaries as meaningless sacrifices, since those salaries make up such a small part of total compensation.

In addition, the "retention" bonuses that Mr. Mullin and the seven top American executives said they would give up should never have been proposed in the first place, critics say. Companies argue that such payments are needed to keep executives from defecting. But the bonuses reward people just for showing up, not for how they perform, management experts say.

In the airline industry, the other big argument against "retention" bonuses is: Why try to keep executives who are running companies that perform so poorly? And given the executives' track records, not too many other companies would be interested in luring away these executives anyway, said Morten Beyer, an industry consultant.

"Where would they go?" he said. "Who needs them? These guys should be glad to have a job."

merican Airlines dropped plans yesterday to pay large bonuses to seven top executives if they stayed with the company until January 2005. But the carrier said it would keep money in a much-criticized trust fund set up to protect the pensions of 45 executives in case it files for bankruptcy protection.

Despite the attempt by American to appease its irate workers, the flight attendants' union said last night that it would vote again soon on $340 million in critical concessions its members narrowly agreed to give the company on Wednesday.

American's announcement came after union leaders denounced Donald J. Carty, the chief executive, and other officials of the AMR Corporation , the parent of American, for agreeing to take the compensation packages while they were seeking annual labor concessions worth $1.8 billion and for not disclosing them during negotiations. American, the world's largest carrier, had told the unions that big concessions were needed to keep the airline from having to seek legal protection from its creditors.